Sangoma Technologies Corp (SANG) 2018 Q4 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies Fiscal 2018 Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) I would now like to turn the conference over to David Moore, Chief Financial Officer. Please go ahead.

Thank you, operator. Hello, everybody, and welcome to the Sangoma conference call. I'm here today together with Bill Wignall, Sangoma's President and Chief Executive Officer, to take you through the fourth quarter and annual audited financial statements.

As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS, and during the call, we may refer to a couple of terms, such as operating income, EBITDA and adjusted cash flow that are not IFRS measures but which are defined in our MD&A. Please also note that unless otherwise stated, all references to dollars are to the Canadian dollar.

The call today will discuss the press release that was distributed over the wire services on October 22, together with the company's annual audited financial statements and Q4 MD&A, which are filed on SEDAR and which are also available on our website at www.sangoma.com. Just for your information, this call is being recorded, and the prepared remarks will be available on our website shortly after the call concludes.

Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical are forward-looking statements regarding the company's or management's intentions, hopes, beliefs, expectations and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results might differ materially from those projected in those forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&A and in the company's annual audited financial statements posted on SEDAR.

With that, I'll turn it over to you, Bill.

Thank you, David. Welcome, everyone, and thanks for joining us today. I'm going to take just a slightly different approach on this call and start with the high-level picture to provide current context. Then I'll go through our more typical flow, starting with Q4 results, then our annual performance in fiscal '18, to be followed by forward guidance, and finally, I'll wrap up with a strategy update before opening the call to questions. I'm guessing this one might take a touch longer than our regular calls, so please bear with me, given the additional content this time.

So let's get started with that high-level picture regarding where Sangoma stands as of October 2018. Just to set the scene, at this time last year when we reported our fiscal '17 results, Sangoma had revenue of slightly more than $25 million. On Monday this week, we reported well over $50 million in sales for fiscal '18. And finally, for the fiscal '19 year that has just started, most of you will be aware that we provided guidance indicating we expect to hit revenues of $100 million. This fourfold increase has radically changed the company. In fact, as I mentioned in August, Sangoma, at $100 million in sales, is one of the top 10-or-so publicly listed Canadian tech companies in Canada as measured by revenue. Of course, any such list depends upon the filters you apply when creating it, and this one excludes the huge media and telcos for obvious reasons, but you get the point. Sangoma is in good company and has really turned a very small, sleepy, unloved public company into one of the top public tech companies in the country. As a result, we feel strongly that the company remains dramatically undervalued and that today's share price absolutely does not reflect the performance of the company nor capture the true value of our business.

Okay. Now after that, on the [vast plug], let me now cover the most recent quarter and full year audited results. As most of you know, Sangoma completed 2 acquisitions during the year, both of which have been integrated into our operations. For those of you joining for the first time or who missed that news, we acquired VoIP Supply in July of the fiscal '18 year and Dialogic's Converged Communications Division, that I'll refer to as CCD, in January. And thus, just a reminder, the comparisons year-over-year are significantly impacted by this.

So let's now turn to our Q4 results. Our fourth quarter ending June 30 was a record and the 14th quarter in a row where we delivered more revenue than for the same quarter in the preceding year. Sales for the final quarter of fiscal '18 were $17.5 million, 128% more than in the same quarter last year and 8% higher than our immediately preceding quarter. The increase in sales came from the ongoing intrinsic growth at Sangoma, the compounding of recurring services revenue as well as the addition of VoIP Supply and CCD.

Gross profit of $9.8 million for the fourth quarter was almost exactly twice that of the fourth quarter in fiscal '17. On a percentage basis, Sangoma's margins for Q4 continued in the mid-50% range. Operating expenses were $8.2 million in the fourth quarter, up 82% from the same quarter in fiscal '17, reflecting the additional expense of running VoIP Supply and CCD, together with some controlled spending increases to invest in Sangoma's growth.

EBITDA was $2.5 million for the quarter, way above the $0.7 million of last year and the first time we broke in $2 million in a single quarter.

Let's now turn our attention to the full year results for fiscal 2018. Sales for the year ended June 30 were $57.4 million, up 113% from the $27 million of fiscal 2017. As indicated earlier, the top line growth this year was fueled by the same factors that affected Q4, namely a mixture of the intrinsic growth at Sangoma, the compounding of our services and software revenue and the addition of VoIP Supply and CCD sales.

Gross profit for the year was $30.9 million, 76% higher than the $17.5 million realized in fiscal '17. Gross margin at 54% for the year is pretty much as expected given where the company sat post VoIP Supply and CCD but prior to the more recent Digium transaction.

Operating expense for fiscal 2018 was $26.2 million, a 63% increase over last year, reflecting continued investment to drive Sangoma's top line growth and the additional costs attributed both to the VoIP Supply and CCD acquired businesses.

While absolute spending is higher for the reasons just mentioned as a percentage of revenue, OpEx is lower year-over-year across all key departments, R&D, marketing and sales and G&A. This financial model of growing investment in marketing and sales and R&D to fund growth but a lower rate than we grow revenue is the obvious driver of expanding EBITDA margins.

EBITDA for the year ended at $6.8 million, more than double that of fiscal '17. Similarly, net income for the year was $2.4 million, 3x that of the year before, while EPS finished at $0.06 per share versus $0.023 last year.

And for the final portion of my commentary on fiscal '18 financials, I'll briefly cover Sangoma's balance sheet and cash flow, given our balance sheet has evolved significantly. Having raised $12 million in March, net after expenses, we started Q4 with $14 million of cash on hand and ended with $15.8 million, providing us the initial muscle to complete the Digium acquisition in September. In addition, we had paid down the operating line, so we closed the year with just the term loans for VoIP Supply and CCD.

Accounts receivable was largely unchanged between quarters and is naturally higher year-over-year following the acquisitions. Inventory levels remain fairly stable, and I'm pleased to report that we've not had any material supply chain impact from the various trade disputes.

Finally, for the year, I'm pleased that we generated more than $5 million of adjusted cash flow from operations. For this measure, we take out the 1x effect of acquisitions to help us compare more apples to apples across time periods.

Okay, I hope that today's commentary on financial results conveys the magnitude of the changes since last year, and I'd like to discuss forward guidance for a moment. Firstly, let's step back to when Sangoma first started issuing guidance. As you may recall, we commenced providing guidance back in early calendar 2017, and many of you have told us you found this helpful for the obvious reasons. In 2 years since, I'm proud that we've not missed that guidance a single time.

Secondly, let's discuss the company's guidance for the fiscal '19 year. At the time we announced the Digium acquisition early last month, we shared that our revenue for fiscal 2019 was expected to be about $100 million and EBITDA was anticipated between $9 million and $10 million. Now with the 2018 results released earlier this week, you will have seen that Sangoma has updated our guidance for fiscal '19. That update was able to take into account not only our full year audited fiscal '18 results, obviously, but also the first month or so of integration work involved in merging Digium and Sangoma. I trust you will be encouraged by the confidence reflected in that update on Monday since there is naturally some risk in the earliest forecasts provided with an acquisition at the time of announcement, which are provided prior to starting the actual integration.

This week, we confirmed the $100 million revenue target based on further information gained since closing, including that we believe the 35% in recurring revenue was doable and we also narrowed our EBITDA guidance to the upper end of the prior range, forecasting $10 million in fiscal '19. Not only are we at the upper end of that range, but we also confirmed that we indeed expect to be operating at a 13% EBITDA margin in fiscal 2020.

And for my final section of prepared remarks, let's now turn to an update on your company's strategy. As we've added quite a few new shareholders during fiscal '18, I'll do this section in a bit more detail today. I'm going to share both, where we've come from and then where we're going. As those of you who have joined us for these calls previously will know, I've characterized Sangoma's turnaround using the phrase, investing to drive renewed growth. We continue to see growth through our combination of organic means, augmented with prudent M&A activity, all while demanding healthy profitability. This is a conscious decision from the Board of Directors, one that most of you also support, based upon discussion with many of the folks on this call, and we are continuing on that path.

A few years ago, when new management came in to take over the reins at Sangoma, we recognized that sales of telephony cards were unavoidably going to gradually decline as networks gravitated away from the PSTN and towards the Internet. So the first stage of strategy was to begin with a complete turnaround and rebuild of the company that manifested as 3 principal planks: growth through broadening the product portfolio, penetrating new customer segments and selling into new geographies. Over the next couple of years, we evolved from a single product line company to one with a much broader product portfolio made up of multiple product lines, all part of plank #1, and this has taken us on the path to becoming a full UC provider both on-premise and in the cloud. In order to expand our market premise -- presence, Sangoma began targeting not just our traditional customers in the SMB segment but also enterprise, OEMs and carriers, fulfilling the second plank in that turnaround strategy.

And plank #3 was to globalize the company and increase revenue outside of North America, especially in regions with higher growth rates. This has the ancillary benefit of also extending the life cycle of our PSTN-based products, since these regions are moving away from the PSTN more gradually than in the more developed economies.

As the turnaround phase was unfolding, the next step in strategy was to go from a portfolio of individual products to a complete solution. So Sangoma now has the ability to offer a full UC suite that includes not only the PBX as the central part of this full solution but also the other products that purchasers need with such a phone system, including phones, telephony cards, gateways and session border controllers. I think you can now see that the whole has proven greater than the sum of the individual parts, and this has allowed us to compete for a larger share of wallet in each sales cycle.

And finally, the most recent phase in our strategy was to take that full solution that could be sold on-premise, a fancy word meaning that the software and hardware is installed at the customer site, and introduce a cloud-based service in which we host our own software and hardware in data centers. We then use it to provide a monthly subscription service for customers who prefer a cloud-based service to the on-premise model. This enabled the recurring revenue to begin its growth phase at Sangoma. One needs the full solution before launching a cloud service because of the nature of cloud customers who tend to seek simplicity and are not interested in hearing, "We have a cloud service, but please go buy your gateway from 1 of these 3 companies or your SBC from 1 of these 2, the phones from 1 of these 4 vendors." That's why cloud has, as a prerequisite, the full product portfolio.

That update on strategy pretty much takes you to the end of fiscal '17. In 2018, our strategy included 2 important acquisitions. I'm pleased to say that both have proven to be excellent decisions. VoIP Supply is performing well, giving us a sales boost, is growing and delivering EBITDA in line with our expectations.

CCD was part of Sangoma for the final 2 quarters of fiscal '18 and has added nicely to recurring revenue, delivered strong gross margin and accretion and has rounded out our product portfolio and sales coverage very nicely, with many talented sales professionals located around the globe.

I am pleased with the way the 2 teams have handled the transition to Sangoma. And for fiscal '19, we already have a single face to the customer.

Okay, so let me turn to the path forward, which begins in this year, fiscal '19. The first element on that path is, of course, the recent acquisition of Digium, which we announced last month. I'd like to pause and simply remind you that Digium does not therefore affect the fiscal '18 results that we've discussed earlier on this call. You will see a financial impact from Digium for the first time in November when we release Q1 numbers for fiscal '19, which will include about a month of consolidated results.

Digium is a true pioneer in the communications market, and as a result, Digium is one of the most recognized and respected brands in our industry and they were our closest peer. They commenced the transition to cloud and their recurring revenue model about 4 or 5 years ago, slightly before Sangoma, and this has been very successful. Digium now generates about 40% of their sales from recurring revenue, and indeed, over 40% of new UC customers choose Digium's cloud-based solution versus on-premise. And they are growing this profitable segment nicely. And although we share some similarity in parts of our product portfolios, interestingly, there is not a lot of customer nor channel overlap. This is wonderful and gives us more coverage to access more customers around the globe.

The addition of Digium is one more highly significant step on the path to building a more valuable company for you, our shareholders, as we seek ways to scale by augmenting organic growth with selective acquisitions during a time of industry consolidation. In order to purchase Digium, we used the combination of USD 24 million in cash and USD 4 million in Sangoma shares. This cash consideration was funded from cash on hand, mostly via the bought deal in March. And in order to minimize dilution, a new credit facility from our current Canadian bank of approximately CAD 21 million. This brought Sangoma's current and total credit facilities to about $28 million, of which $25 million was outstanding at closing.

We're very comfortable with this leverage, which will come down nicely over time and still have ample cash and an operating line available for working capital purposes. Clearly, we expect some very significant benefits to Sangoma as we merge the 2 businesses together, and I'll summarize those now as I'd shared at the time of the announcement.

First, the Digium transaction will merge the 2 largest open-source communication projects under one roof, enabling Sangoma to become the undisputed leader within that space. Together, we have enough scale to create what we feel is the leader in enterprise value-based communications. This is a segment in which customers look for all the advantages of Unified Communications at a fair price, either in the cloud or on-premise. We can now give customers pretty much everything they need all from a financially stable and growing company that they can depend upon. They don't have to worry about all the software and hardware working together because we supply all of it, and we offer global support to help them with any problems 24/7.

Second, financially, this acquisition is transformative for Sangoma. It is expected to add revenue of about $30 million per year, putting us at the $100 million in sales, as you've just heard, quite an accomplishment in a couple of years. Further, Digium is a 70% gross margin business, bringing us up into the 60% on a combined basis. Also, it comes with opportunities for efficiencies in many areas as the merged company can take advantage of duplication in such spaces as corporate expenses: for example, things like insurance or audit fees; or marketing programs, for example, exhibiting at the same expense of trade shows; or travel or contract manufacturers or warehouses. It's a long list and we're working our way through it well these days.

Third, we continue to look for ways to grow our sales from recurring sources, and Digium almost doubles our recurring revenue. Since Digium's revenue from recurring sources is about 40% of total, it will bring Sangoma's overall recurring services revenue to about 35%. This expansion of our overall recurring revenue portfolio, which, if you review our overall strategy has been a high priority for us and one that was started pretty much from scratch just a couple of years ago, is a key part of our growth strategy.

Fourth, Digium products are highly complementary to our current portfolio in many ways. For example, we offer -- hosted PBX in both companies, sometimes referred to as UCaaS or Unified Communications as a Service, and SIP trunks, as the 2 primary parts of our respective cloud services. But encouragingly, Sangoma has more penetration in SIP trunking, and Digium has more penetration in hosted PBX. Or another example might be looking at the synergies from having the 2 most widely used open-source projects under one roof and the ability to write a new software feature once instead of duplicating work. Anyway, you get the idea that Digium product lines will become an integral part of the overall portfolio and will enable us to serve a broader range of customers more effectively together.

Fifth, Digium has thousands of customers and a lead generation machine that produces tens of thousands of leads. Customers range in size from SMB to large-scale enterprises to service providers. And the average-sized cloud customer for Digium is slightly larger than the traditional Sangoma customer. We will, of course, be looking for cross-selling opportunities in both directions and have already uncovered some initial examples.

Sixth, along with these customers, the 2 companies have highly complementary, mostly nonoverlapping, distribution networks. Combining each of the company's channel footprints will enable better channel coverage to customers than either company could have achieved on its own.

And finally, the last but certainly not least, advantage for merging these 2 companies is that we've added a group of very talented employees at a time when competition for talent in our industry is very high. The new Digium staff are quickly becoming part of the Sangoma family and focusing on growth as Sangoma has done for the past several years, providing us an opportunity to further strengthen our management team.

With that backdrop on the Digium deal, I'd like to offer a few comments regarding early progress on integration. We've just bought a company that adds a substantial set of people, systems, customers, locations, products, et cetera. Merging these businesses together is not really a sizable task, but the process is well under way, and I hope that this transaction, being our seventh in 7 years, will provide you the confidence that these teams are more than qualified. The timing for this plan involves 2 broad steps. In the quarter we are now in, our fiscal Q2, we expect to make most of the key decisions around those products and systems and people, et cetera. Once this is done, we will put those decisions into action almost immediately, with most of the integration activity taking place in our third quarter and completing it by Q4, that is we fully expect to have substantially completed the integration work before the end of this fiscal year. That is admittedly an ambitious plan but one we're confident we'll execute on, enabling us to exit fiscal '19 even stronger than we are today and already on track for the 13% EBITDA we're committed to in fiscal '20.

I can share with you that I'm encouraged by the early progress already made on this integration project in just over a month and by the cooperation and focus of the combined teams. We are now reassured and comfortable with our projections for fiscal 2019. As we go through the next few quarterly calls with shareholders, I will provide more specific detail on our progress with this critical integration project, including the decisions in Q2 and the actions in Q3.

Finally, I will say that I've had a few questions from individual investors asking, in effect, "So what's next," or, "When might you do the next acquisition?" I'll simply state that we acknowledge these are reasonable questions, but the team here is very busy integrating the 2 businesses just now. We need to keep focused on that for the next couple of quarters. So in fairness, I'd not anticipate further M&A announcements as being too likely during that period.

Okay, that's it for my prepared remarks today. In summary, just a few short years back, Sangoma was a nano stock -- nano-cap stock, with just $10 million in revenue, not growing, with one product line in declining space and running around breakeven. I think we'd all agree that being public with those stats was problematic. So new management put in place a turnaround strategy that you've heard about many times already, and we're working on building real scale at Sangoma. You now see via a proven track record that we're getting there. This needs organic growth, driven by new products, new customers and compounding recurring revenue. But it also benefits from prudent acquisitions with good strategic advantages that can augment this organic growth.

Sangoma is now a $100 million company with demonstrable growth, 10% EBITDA margin going to 13%, that is cash flow positive and with the management to continue winning new customers, building new products and acquiring new businesses. The turnaround from a few years ago has created a strong public company, with a history of delivering on its promises to both customers and shareholders. We've come a long way and fully intend to continue on this path. And we did all this while not raising a lot of additional equity that would have diluted shareholders and while building out an entirely new portfolio that required very significant R&D investments, completely repositioning the company, getting us on the recurring revenue path, buying multiple businesses and growing profitability throughout that entire sequence. I think you'd agree that's a pretty unusual set of circumstances.

So while we're all happy to see the market cap grow to $60 million or $70 million versus the $10 million of a few short years ago, as I'd mentioned earlier, given this track record, the current state of the business and the encouraging outlook, your board sees today's share price in the $1.30 to $1.40 range as dramatically undervalued and something we continue to work on.

Wrapping up, I'd like to personally welcome our new colleagues from Digium and to thank our traditional Sangoma employees for their incredibly hard work delivering fiscal '18 and our customers for their loyalty and finally you, our investors, for your support and patience as we built trust and delivered on what we said we would do. We trust you see the rewards of that hard work now.

With that, I'll conclude my remarks, hoping I provided you with a clear understanding of your company, and turn it back to David for questions.

(Operator Instructions) Our first question comes from Nick Corcoran with Acumen Capital.

Nick, you might be on mute.

So my first question is just with the EBITDA margin in the quarter. It was higher than, I guess, your normal ranges. Were there any onetime items in the quarter that drove this?

No, there was no single thing. Nick, it was not a particular order that caused that. It was just the mix of products in that quarter. Nothing strange or singular out of the normal.

And then another thing was the tax rate was higher. Can you just speak to that?

David, can you take the tax rate question?

Nick, do you want to be more specific, please?

Yes. So the tax rate in that was just higher in the quarter. I think it's in the 50% range, and it was higher than what has been in the previous quarters.

Likely just ties to the year-end tax, David?

So I mean, tax is a whole different subject, Nick. It's probably better we take that offline. It's like your own personal taxes. It depends a lot on when you recognize tax losses and all these things. We have tax filings in multiple jurisdictions. We have review of those and tax balancing and transfer pricing discussions all the time. There are changes in rates in the different countries and all these things that have affected us. So if you're looking at tax, it's a bit like your own personal tax, that the year is relevant, that the quarterly or your monthly income is kind of interesting. But whether you take a capital gain on January 1 or December 31, it makes no difference to your final tax payment. Well, the timing doesn't make a difference, but obviously, it changes your tax position considerably. So there is nothing in particular in any quarter. It's just there are a lot of factors as we look to balance the actual tax paid and make that as close to 0 as we can. And so the tax that you see in the statements, those are the taxes that we pay utilizing the SR&ED benefits and all those kinds of things. Our actual cash taxes paid is relatively small, but the way it gets reflected for IFRS purposes, yes, it shows as a high for 1 particular quarter.

Our next question comes from David Kwan with PI Financial.

Maybe a question more for you, for Bill. On the EBITDA guidance, you raised it to the high end of the range. I guess that's -- is that based on what you're seeing so far for Digium and maybe seeing better-than-expected cost savings there? Or is that also maybe factoring what you're seeing in your core business at Sangoma, noting that the EBITDA was better than expected this quarter, in Q4?

Maybe I'll start, David, and you can elaborate if you wish. So I think, David, that the first part of your supposition there, I would just say it's not related only to Digium. Of course, we have to factor in what we've learned over that first month and starting to go through the integration process. But it factors in the outlook for Sangoma and the organic growth and the compounding as well naturally as what we've seen at Digium. It's partly related to the synergies as you rightly assessed. I think it's probably less about, oh, we found more than we expected and more about, when we forecasted 9 to 10, we have to be careful because you're making a forecast, as I said in my comments, before you're actually merging the 2 businesses together. And pleasantly, I think we found that the original assumptions are pretty good, and so we're more comfortable at the higher range. And we also have a little bit more visibility to revenue outlook because we're now a quarter into the year and are able to be inside Digium rather than looking from the outside. So it's both the Sangoma and Digium businesses, not just looking at one, and being able more to confirm synergies rather than seeing more than we expected, along with visibility to revenue at this point in the year.

Great. And I appreciate the color on the Digium integration work to date. Have you seen any surprises that obviously you maybe weren't expecting when you first kind of started sort of looking into bringing the 2 businesses here? And can you comment maybe on what the response has been from their employees, any cultural issues, anything like that?

Yes. Sure. Well, anytime you do an acquisition, I would have to say as a team here that's done a lot of them, both at Sangoma and in prior lives, you will almost always see some surprises, and some are on the upside and some on the opposite. And then I would say Digium is no different, and I think we're very happy with what we found. If you'd like a couple of examples, I'm happy to do that. But I wouldn't want the examples to cause us to get lost in the weeds. Basically, it's looking pretty much what we expected, and both teams are very happy about that right now. So an example or 2. I don't know, David, like there's lots of them, right? The extent to which the channel networks do not overlap has caught both companies by surprise. For companies that were the closest competitors in the industry and had some product overlap, one might intuitively expect you would end up with lots of the same channel partners. And in fact, that's not the case. And although we knew that there might be less than we expected, the degree to which that's true has pleasantly surprised both businesses, as an example, right? What else might I say? That's a kind of sales and marketing one. The processes and systems that we referenced as a potential upside benefit to the combined company, which we now understand at a much deeper level, have proven, I think, to be encouraging to both businesses. Whether you think those types of internal IT systems and the processes which reside on top of them, now which is really low level, in some people's eyes, boring, blocking and tackling stuff, but really is critically important, in some cases, to scalability and repeatability. Whether you think that stuff should be done at $30 million or $50 million or $40 million or at $60 million, I think everybody in the combined companies acknowledges that we need it at $100 million. And the ability to be in there and see that stuff and understand the details of those processes and the systems upon which those processes are built now has been pleasantly surprising. What about on the other side, on the downside...

Well -- sorry. Like one thing I think that sometimes is an issue, and I don't know to what extent that it may be in phases in some of your other transactions, was -- and I think just the integration of the IT systems, that can sometimes trip companies often in the integration phase. So curious if you've seen anything there that looks like it could be more difficult than maybe what you've seen in the past.

Yes. It's too early to know that, David. Like as I said, you were kind of in the beginning of that first quarter of work, and that first quarter is the planning, not the doing. I mean, there's no doubt this is a big project, but we've been through that kind of a project in earlier acquisitions. It is hairy, and so a lot of work for a lot of people. I can tell you, we have underestimated it in at least one prior acquisition and ended up having, as I might have mentioned on a prior call, lots of people working 24/7, around the clock, stuck in data centers. So there is some experience there. It's too early to know whether that's a bigger job than we thought it would be, and that's one of the things I'll update you on as we go. But there were not too many systems that we found at Sangoma or Digium that either of the 2 teams had not foreseen. So it's feeling okay right now, but it's at the very beginning stages.

Okay. Great. And from a people culture perspective, anything there that maybe has some concerns for you?

No. There's nothing that has concerns there. I mean, there are 2 significant-sized companies coming together, and almost, by definition, the cultures were slightly different but not enormously different. There's lots of factors in what makes those kinds of businesses end up with different cultures, and part of it is where in the world the people are based. And in Digium's case, everybody is in the U.S. So that has some influence on the culture, and Sangoma is based -- there's a lot of people all over the world, right? You've heard me talk in prior calls. We have people in, probably, I don't even know anymore, half the states, 25 of the 50 states, and Colombia and Equador and the U.K. and Ireland and Belgium and France and Germany and Spain and Italy and Hong Kong and India. That leads to a different set of cultural dynamics, but we've had people from Sangoma in all of the Digium offices. We've had the start of Digium folks now traveling around the world in lots of Sangoma offices offshore. I heard good feedback today from a visit by one of the key senior technical people at Digium in the India office and really getting along well. So not to be dismissive of it, David, but I do not see culture as being a big hurdle here. There is room to continue improving in that area as you take the best of both, but this doesn't seem like a high-risk point for me today.

Good to hear. Two more questions. You kind of talked about it earlier, Bill, just on the channel there and the lack of overlap. I was curious to get your thoughts on to what extent you think you can maybe get the vast majority of the channel partners of both companies selling both platforms and how long you might think it could take to get to that point.

For sure, it's a bit premature for me to comment on this one. What I think I could do without just doing it in a super-general generic way, David, is I can tell you about some of the observations we have so far from some specific activity. But taking 1 month of activity and extrapolating it into I think we'll get 79% of the channel selling both products is it's just too early. But that doesn't mean nothing's happened. We've been out talking to Sangoma partners about the interest in that channel network of being able to sell the Digium portfolio, and we've been out in front of the Digium channel network to ask the same thing in the other direction. I personally have been in front of the largest Digium customer in the world. We held a conference in Orlando at the big AstriCon show, I don't know, 2 or 3 weeks ago, with some of the largest Digium resellers in the U.S. So the exposure has begun. And I will say, without exception, and again, this is with the caveats, it's a bit premature, but without exception, every single partner I visited, whether it's 10 or 12 at a meeting in Florida or one in Cleveland or one in the U.K. and one in France and et cetera, and whether it's a Digium partner or a Sangoma partner, for certain, if you are in the business of being a distributor or reseller, one of the things that makes you excited and helps you grow your business is more products. And so the network will naturally be predisposed to one thing, if you are a Digium partner, the ability to sell Sangoma products, and if you're a Sangoma partner, the ability to sell Digium products. And we're now going through that process to figure out how to get the best bang for our buck. But the partners want it, David.

Perfect. Last question, I guess, for David. Just on the tax, moving back to the tax rate. How should we -- what should -- I guess, using it in our models, forecasting for at least fiscal '19, just understanding the difference in tax rates in the U.S. and elsewhere.

I think that will be -- I can probably answer that question in 6 months when we have to do a tax year-end for Digium. We have to do the valuation of the businesses, which sets up the various intangibles. There's a whole host of things that go into that calculation, David. So I think it's too early to talk about an item which is a derivative of countries' exchange rates, a whole host of things that are not really just tied to their sort of day-to-day operational business. They are around structural things, movement of product around the world, differences in supply chains. So we will get that all sorted out. We already have ways to get after some of the tax losses that Digium had. We continue to have some SR&ED loss availability in Canada. The tax rates are lower in the U.S. than they were last year. So this is a substantial exercise that will be done once we've got a clear picture of how we expect the combined business to operate and where we ship from, where we sell from, where we recognize revenue, et cetera, et cetera.

And I guess maybe the only other thing we might choose to add into that explanation is I'd mentioned on our last call, which related specifically to the Digium transaction, it wasn't a general-purpose quarterly call, that Digium comes with some material tax losses. So that needs to be factored in as well, David.

(Operator Instructions) Our next question comes from Gavin Fairweather with Cormark.

Just a couple of questions for me. I know that you're in the process of launching your cloud product in the U.K. How do you characterize kind of the interest or demand over in Europe for cloud-type products, understanding that penetration there is quite a bit earlier stage than in North America?

Yes, that's right. It is earlier stage, and like it's so new for us. It's pretty tough to comment intelligently. I can say 2 things. One is I think if you wish, and this is an interesting topic for you, I'll be in a better position to comment in a quarter. And then secondly, I'll tell you what those initial customer targets and segments look like. So when you're building out a business like that, one of the questions a sales or customer-facing organization should be asking of itself is do we go find end users first or go find channel partners, and what's the go-to-market strategy. So I will tell you that the early focus there is on the beginnings of building out a network of resellers or agents who want to sell our cloud service and expand our feet on the street, for lack of a better word, early in the process. So that has to be done before they can go and then find end users. So that's the process that we're in for October, Gavin, like it's at the very beginning. The network is now stable. Calls are going through it. The equipment has been placed and tested. But there just simply aren't enough customers on it to tell you much about how that progress looks at this stage.

Okay. And then coming back to North America. Have you noticed any change in the go-to-market approach of some of your cloud folks and peers out there in terms of pricing in the market or how the channel is compensated? Or is it kind of status quo?

No. It doesn't seem to be swinging wildly. We have commented on calls like this in the past that there's a fairly wide range of channel compensation philosophies out there. So I don't think there's a single answer to your question. But what that range looks like and what are the outside brackets on that range, I haven't seen changing too much, Gavin. There are some service providers who compensate the channel with a onetime fee. There are others who compensate the channel with recurring revenue or a split of recurring revenues. Sometimes they give a multiple of months of recurring revenue but paid upfront as a commission. Sometimes the channel partner gets that commission over time as the end customer pays. So it does run quite a wide gamut, but I haven't really seen any big stuff changing there in the last month or 2.

Our next question comes from Gabriel Leung with Beacon Securities.

A couple of things. First, Bill, I think I asked you this question the last time when you had your Digium call, but it was around revenue attrition -- potential revenue attrition. Now you talked about, I guess, now the -- there's a lack of overlap on the distribution network side. I guess that's given me a good mitigating factor. But I'm curious on the competition, whether or not you're seeing some of your -- some of Sangoma or Digium's competitors aggressively going into your joint customer base, trying to steal some customers during this integration phase.

Yes. You did ask me that last time. I did offer to give you an update after we've been integrating for a month or 2. So, so far, the answer is 0, Gabe. But in all fairness, it's a bit -- it's a perfectly valid question, and it could be that we just haven't seen that percolate up to the stage where it's visible to us. So I'm not particularly worried about this, and I sought to reassure you that I don't think this will be an issue. But like I said on an earlier question, I don't want to be dismissive. It is a fair one. And the fact that there's 0 examples of it in that first 1 month doesn't necessarily mean that 0 is the answer forever. But I also want to take the question and try and shape it into what are the things that could materially affect the business and the outlook. And I think the probability that attrition of customers just because of all those concerned that we're merging these 2 businesses in any way comes close to the upside potential of being able to put together nonoverlapping channels is super low. The upside from Sangoma having less than 1,000 resellers in North America and Digium having more than 4,000 and Sangoma having a channel network very well built out around the globe and Digium doing almost all of the business in North America, it's -- that's just a lot of good stuff there. And no matter whether the number of customers that might be a bit nervous and churn away is 0 or 31 or 7 after a year, really, I don't think, Gabe, should affect that, that calculus.

Got you. And maybe just moving over to the growth, I guess, looking forward. Beyond the segmentation that you provided in your financials, product and services, can you go a little bit deeper into your portfolio and sort of -- and maybe highlight some of the product areas which you're most excited about, I guess, over the next 12, 24 months, whether it's PBX or cloud or session border controllers or whatever? What are the areas where you see the best growth opportunities between the 2 companies?

Yes, maybe I can do it qualitatively. We tried to avoid getting into specific growth rates of specific product lines for competitive reasons, as you remember, but at a qualitative level, I would say, cloud remains the #1 interesting product line. That's not just because it's growing the fastest. It's because it's an area that's newer in the market, and so there's -- the strength of the incumbents has built up over 3 years or 5 years or 8 years, not over 3 or 5 or 8 decades. The percentage of new adoptions that involve a customer choosing a cloud solution each year as a percentage of that total is going up. So I mentioned that in the Digium case, we're seeing 40% of UC customers choosing cloud, and that increases each year. So there's a trend or a wave that we're looking to ride. And then lastly, maybe the third reason that the cloud business is the #1 product line that we're paying attention to is simply because it's recurring revenue and comes with higher value creation for shareholders. The second one, I would say, might be the UC on-premise suite. That is still a very important business. And because both Sangoma and Digium have a competitive advantage versus many other vendors out there in that the technology stack we use when selling a premise solution versus a cloud solution is identical, we care a lot about that on-premise solution and the investments in R&D because it benefits not just the on-premise business but the cloud business as well indirectly. That would be the second one. I think the importance of the product from Sangoma that we talked about once but very superficially, there's a product we've released called Zulu, which is our UC client. It's a piece of software that resides on a person's desktop or on their mobile phone. This is a much newer space in the industry. I really like that product. It feels like we have some competitive differentiation. You can kind of sense some energy around it. I'm looking forward to seeing how that evolves over the next little while even though it's brand new. And then maybe the last thing I would say is you asked about, for example, session border controllers and things. The way we look at those products now is quite different, whether it's an enterprise sale or a sale of products used in a network backbone. So if it's an enterprise sale, I would say increasingly each year, a larger fraction of connectivity products, whether it's an SBC or gateway or something, are pulled along with or tied to UC deployments. It doesn't mean they're all like that, but that attachment rate is increasing. And then an SBC or a gateway or something like that that's used in a network backbone by a large enterprise or by a carrier seems to be looking more interesting the last year or 2. The acquisition of CCD has given us products at higher price points and higher capacities and performance and customers and channel partners who use those products or appeal to those end users. And so there's a little bit more resurrection in that customer segment, I would say.

Got you. And I was curious, with Digium in the fold now, where does the telephony card business stand as a percentage of total revenues? Are we sort of between 5% to 10% of revenues?

Yes. I'll just choose not to answer that, Gabe, because it's right in the sweet spot of breakdown revenue by product line. And as I said, it's the most competitively sensitive stuff. But your idea that it is a very small fraction and a product line that gradually declines over time is right on.

Got you. All right. And one last thing, David. I'm going to ask my tax question. How should we think about cash tax rates for fiscal '19?

So our cash tax payable is significantly lower than the tax that shows on the income statement even though there are a number of items that are in the income statement that aren't tax deductible. So you get these 2 factors where our actual tax rate looks high, but our tax cash paid out looks low. But it is subject to a gain. We just absorbed the business, let's say, 30%, 40% of our total now. It changes how we operate the business from a tax perspective, and we only closed 45 days ago or so. That's a 6-month piece of work to get that figured out so that we minimize the tax that we pay in 2019. And my job is to do that first, and if that gives me, along the way, a view as to exactly how those 2 numbers will shake out, that would be great. But my #1 priority is to make sure I test all the opportunities that we have to maximize the use of tax losses, to minimize our actual cash outputs. So it is an extremely complicated process, some of which is iterative, so it's going to take months for us to figure that out.

Okay. But if I say 0 or 10% in cash tax rate, you're probably not uncomfortable with that range.

If you don't know, just say we don't know yet.

We just closed a very significant acquisition. Our task is to run that business to meet the targets that we've set. If I have the ability to forecast exactly what the net income would be after tax, I'd be happy to provide that, but we simply cannot do that yet.

(Operator Instructions) Our next question comes from Jeremy Klein with Edison Asset Management.

I was wondering if you could comment on what makes Sangoma's technology or strategy or execution different from your peers.

Sure, of course. It is a complex question as I think you can imagine, and it can be a 5-minute answer or a 5-hour answer. I'll start and we'll -- to see where to take the question. So I touched on something a few moments ago that was only a piece of an answer. And I'll start there and elaborate on it because it's maybe one of the more important pieces. In the cloud business, one of the things that differentiates us and is a competitive factor is this idea that the functionality that ends up being available to an end user is the same. Whether the end user chooses an on-premise deployment or a cloud deployment is really very important. So I described it in my earlier comment as part of a conversation about which product lines have higher growth and which ones do we pay most attention to. And I said we pay a lot of attention to our UC product because it's the same technology stack whether it's used on-premise or in the cloud, but it's the fact that it's the same technology stack which manifest to the end user as the same capabilities that matters in the sales cycle. For most of our competitors, not all but most, the sales cycle goes something like this: Hi, Mr. Prospect, we hear you're looking for Unified Communications. Do you want it in the cloud. No. Oh, then you're not our customer. Please call someone else. Or yes, I want it in the cloud. Oh, okay then, you are our customer. Secondly, it might go like this: Do want it in the cloud or do you want it on-premise? We don't know yet. Then we can't tell you what the product does because the product that you get on-premise versus in the cloud is different and has different sets of functionality at the end-user level. So the existence of a single technology stack, whether chosen in a CapEx model to be purchased once by the customer, deployed on site, maintained by them, versus an OpEx model deployed in the cloud, paid for monthly, it is quite a useful selling proposition because the sales cycle goes, "Tell us what you're looking to do. We'll explain if our UC capabilities match, and we can talk about whether you want it on-premise or in the cloud later." So that's one differentiation. The next thing I would reference is that the pricing tiers and how we fit into the industry. Sangoma is highly consciously, even with the Digium merger, positioned in the middle. We tried to be known for quality and performance, reliability. For instance, Sangoma has one of the industry's only lifetime warranty on some of our products, but priced below the biggest 2 or 3 vendors. Now that doesn't mean we can sell on price. We are above all of -- we have a kind of -- I have to come up with a better word for this. Sometimes we call it bottom-feeders, which is too derogatory. But there's a lot of companies that sell on price low, and those companies are not our competitors. And the customers who buy based upon price are not really our customers. And so that is a unique proposition that serves us well and differentiates us against the biggest guys at the top and most of the small guys at the bottom. And then maybe the third thing I would cite, and I guess that this could be 5 minutes or 5 hours, depends how many things we're going to go through, but on this kind of a call, 3 is probably enough, it's the use of this open-source concept which is maybe the least intuitive of the 3 things I had mentioned. It's not the case that every single customer who comes to us originates with or cares about open source. But as a competitive differentiator, it is very unique for us. So the idea of open source in which there are a large number of users of either the Sangoma open-source project called FreePBX or the Digium open-source project called Asterisk, which we believe and evidence has proven to be true, have some positive predisposition to doing business with us gives us a leg up. As I said, it's not a guarantee. It's not the case that a user of, I don't know, FreePBX is absolutely going to buy their tech support from us or phones from us or a training service from us or a gateway from us. But if they need a gateway or they need tech support, it seems logical that we have an advantage. And that would be the third thing I would cite as differentiating in the marketplace. How is that? Is that enough for a short call to get you a feel?

Absolutely. That was excellent.

This concludes the question-and-answer session. I would now like to turn the conference back over to David Moore for any closing remarks.

Yes, maybe just before -- we've had some very good questions. We do appreciate that. But just before we close out, I just want to ask the audience again if you have a question you would like to ask us, please take this opportunity. So I was going to give you 1 more minute, and then if there's nothing else, we'll close down the call.

Yes, I personally really welcome another tax question.

(Operator Instructions)

Nothing, David? No more showing?

Just give it 30 seconds, and then -- okay. So it does look like -- we've hopefully had an opportunity to answer all your questions. Thank you very much for joining us today.

Sorry to interrupt. We do have a question. This is Jordan Zinberg with Bedford Park.

Just a quick one here, just comparing your '17 to '18 numbers, looking at some of the cost drivers, I noticed that your sales and marketing and R&D as a percentage of revenue came down pretty significantly. Was that just a function of the change in size of the company? Was that targeted? And looking forward, would we be closer to kind of the 19%, 20% historical where you've been on both metrics or down more in the kind of 13%, 14% where you were in '18?

Yes. It is related to your hypothesis but not only to that. So it's coming down as revenue goes up, and it comes up or down as we have opportunities to explore and try out different go-to-market strategies. So I don't really want to tell you whether it's 18% or 19% or 13% or 14%. It's going to be in that range. And we often move OpEx money around between the 3 sub-buckets. We might spend more money in a quarter or a year on R&D to launch an important new product and spend a little bit less as a percentage growth in marketing and sales even though the absolute dollars in marketing and sales are going up as we explore more opportunities with customers who might choose to buy online, and so Sangoma might retain a larger fraction of the end-user revenue. That can affect sales and marketing cost. As we open a new territory and start selling into a new region, that can be more expensive for a quarter or 2, and so it might go up. So there's a bunch of factors. And beyond that range, I don't think we should say it's going to be 15% to 16% for sure and lock ourselves into that. If we need to bump it up by a point or 2 in order to fund some special initiative, please trust that we'll manage the overall OpEx budget within the envelope to still get us to the 10% and then 13% EBITDA.

Jordan, the other thing is it is impacted by acquisitions. So the Digium profile is not exactly the same as Sangoma's. So the combination of the 2 companies will create a slight step-change in those ratios. What I can tell you is if you look back over 2 or 3 years, you will absolutely see that on an aggregate basis -- or on a relative basis, in quarters where we haven't had acquisitions or years where we haven't had acquisitions, you'll see a steady decline as we continue to seek growth with as little incremental investment as we can. So it will generally trend down over, not a quarter as Bill has indicated, it could go up or down...

As a percentage of revenue but not in absolute dollars.

Right. But on a percentage of revenue basis between years, all other things being equal, we expect to grow top line revenue and gross margin faster than we grow OpEx. Does that make sense?

Absolutely.

Okay. Nice to have you on the call, Jordan.

Yes. Thank you. So thank you, everybody, for putting your neck on the line and asking questions. That was very helpful. I hope that's given some additional color to the presentation. And with that, I would like to bring today's conversation to a close. We will be putting a recording up on the website shortly. We very much appreciate all your support for Sangoma over the past year and wish you a very pleasant rest of day.

David, maybe just a reminder about the timing anomaly this time of year and that we'll be doing this again in a month, is that worth mentioning?

Yes. That's correct. Because of the audit cycle and everything associated with that, our Q4 results are obviously calculated on the same basis and time frame, but the audit cycle delays those quite substantially. So yes, we will be revisiting with you in a month as opposed to 3 months in this particular case.

For the Q1 results.

Yes.

Okay, guys, thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.